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How about a guaranteed gas price, Jerome?

by ManfromMiddletown Fri Nov 3rd, 2006 at 10:35:51 AM EST

I'm posting this as a response to Jerome's call for discussion of gas tax.  I believe casting government management of energy consumption as a tax is a mistake.  I believe that it is far better to cast this managment in terms of generating stability than generating revenue, thus I propose a guaranteed gas price (GGP) to restrain consumption, and further to avoid the counterproductive tendency for present conservation to create future consumption.  I've reworked all this from a comment on an earlier diary.


Governments could use a GGP to drum up support for a stable gas price to encourage stability so that investments in alternative energy sources like ethanol or bio-diesel (which would seem ideal for Europe given the prominence of diesel) aren't wiped out by price drops resulting from reduced consumption (which creates increased demand in the long term, ie Jovan's Paradox)

It would be best for governments to impose the GGP when prices are at their peak.  The second aspect of this would be a guaranteed rate of return for oil companies set at 5-7% over cost.  Oil companies would have to open their books to ensure that no accounting tricks were played to boost costs to ensure a larger profit.

Suppose that gas rises to €4/litre, and the government implements a guaranteed gas price.  Although consumers lament the high price, do they prefer price stability over the uncertainty that prices might go down?

If the price is imposed at the peak, then as prices fall resulting from reduced demand brought on by conservation measures, the difference accrues to the government.  It's a Keynesian approach to gas taxes.

Governments can pump billions of euros into conservation measures, however so long as short term reduced demand results in long term increased demand by creating uncertainty about the relative value of conservation costs versus the long term percieved price of gas, the conservation effots may be counterproductive because of Jevon's paradox. By internalizing government induced economic gains from conservation, uncertainty is reduced.  The key is to remove the price function from the market which has failed in internalizing the external costs of gasoline.

While the implementation of a guaranteed GGP might require governments to forgo tax income in the short term, in the long term the stability brought on by a guaranteed prices allows consumers to make exact calculations of the value of conservation measures.  And if governments are able to reduce demand by 10% instead of that reduction fueling demand, the reduced price creates a gain to the government.

An example.

Suppose that the GGP is implemented at €4/liter, and the government spends €50 million to implement conservation measures.  These measures (grants to reduce the price of fuel-efficient vehicles, grants to biodiesel producers) reduce demand by a full 10%.  Before the conservation measures, annual consumption was 10 billion gallons, after it is 900 million gallons.  Now suppose that the pre GGP price of gas moves from €4/litre to  €2.75 as a result of the demand reduction.  That means that €1.25 minus €0.20 for oil company profits goes to the government, so the government gains €1.20 a gallon. In the long term, a GGP is the equivalent of a 38% tax.  

By creating guaranteed pricing for renewable alternatives beneath the €4 GGP, renewable energy that reduces dependence on becomes the cost efficient option always.

The main thing is to create stability, so that individuals can make explict long term calculations on the value of conservation that don't include an uncertainty factor.

Poll
Is a guaranteed gas price a good idea?
. Yes 40%
. No 40%
. Maybe (explain below) 20%

Votes: 5
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I'm going out so if I don't respond it's not that I'm not interested in discussing your responses.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg
by ManfromMiddletown (manfrommiddletown at lycos dot com) on Fri Nov 3rd, 2006 at 10:37:17 AM EST
But if it is a guaranteed price, and prices keep going up after that, does that mean that the government should subsidise gas?

And given a guaranteed price, would not prices tend to stay at this level instead of going down, because what incentive would there be to lower underlying prices at all? Why not keep them at 4€? If the consumer can't find cheaper gas at your competitor anyway?

Creative, but I will have to vote no.

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by A swedish kind of death on Fri Nov 3rd, 2006 at 04:27:01 PM EST
  1. with a max set price Saudi just trims production to keep the spread as low as possible.   If a high price is going to minimize consumption, they'll want that revenue to accrue to themselves rather than taxes.  Europe has gotten away with high taxes because most of the world didn't follow and production was in large surplus.

  2.  PUC type regulation of oilco (setting 5-7% revenue) will be a nightmare.  Every project will have to be approved by a govt revue board.  Otherwise, no one will risk big, big money for a 5-7% return.  

  3. If you go the next step and have govt run energy business, my experience is you create incompetent, corrupt agencies that make Exxon look like Mother Teresa.  Can you imagine Exxon run by "Brownie" and the rest of Bushco's half assed frat brothers?  Ask anyone who worked with ENEL in the 80's to early 90's how much fun that was.

Jerome's approach is correct.  Throw a tax on petroleum transportation fuels and use it to stimulate alternatives and cutting other taxes on the average Joe.  To sell it, you have to leave Joe Sixpack revenue neutral, at least at first.
by HiD on Fri Nov 3rd, 2006 at 04:59:27 PM EST
To sell it, you have to leave Joe Sixpack revenue neutral

The swedish greens has been quite successful in promoting gas taxes as a tax-shift. Shift taxes from income to energy. "Tax energy not jobs!" is a good slogan.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Fri Nov 3rd, 2006 at 05:48:33 PM EST
[ Parent ]
Even better - make it a net benefit for the poor, by reducing other regressive taxes in ways that bring money to households in a visible way.

But that would be the main idea, yes.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sat Nov 4th, 2006 at 03:07:18 PM EST
[ Parent ]
Throw a tax on petroleum transportation fuels and use it to stimulate alternatives and cutting other taxes on the average Joe.

This is the problem, by encouraging alternatives you reduce demand for oil.  By reducing demand for oil, prices drop.  When prices drop, the incentive is to use more gas, which in the long run raises consumption to the point where it began.  

By having a stable price, the negative long term effect on consumption brought about by the price drop is averted.

On the issue of companies oil companies manipulating prices, I have a simple solution. The world market gas price is set by factors out of the control of any individual producer.  OPEC producers control a smaller percentage of production now than ever before.  Faced with a OECD-wide effort to limit consumption, OPEC would be broken.

The mariginal effect of energy prices on GDP are less now than in the 1970s. And as for the prospect that producers would raise the price, aren't we better off in the end incorporating the true cost of oil into the sale price than subisidizing the  cost of oil production through military interventions.

I sincerely believe that Saudi oil should face high tariffs, if not outright embargo.  And if China and India know that the price of Saudi oil is an embargo on their goods they will be forced to comply.  How long can the Saudis survive if denied oil revenues?

And maybe it destroys the House of Saud, and installs an Islamic theocracy.  So be it.  Better the West confront an inevitable outcome on our terms than those dictated to us by a dictatorship.  By cutting out the middleman, Western publics will be able to see directly where their money is going to.  Better we acknowledge the true cost of oil than forever live under the illusion that the price at the pump includes reflects the true price of oil.

And on the manipulation of oil prices, impose a 100%VAT starting at the price of crude with payment incument upon the oil distrutor.  If the little bastards try to manipulate the interior costs, the greater the level of price manipulation the more the oil companies have to pay out in taxes.

Boosting the guaranteed return to 10-15% might ensure greater compliance as well.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Sat Nov 4th, 2006 at 02:25:41 PM EST
[ Parent ]

By reducing demand for oil, prices drop.  When prices drop, the incentive is to use more gas, which in the long run raises consumption to the point where it began.  

you should increase taxes precisely when oil prices tend to drop because demand slows. Keep the effort going, it will actually be quite painless as the price to oil producers drops and the portion going to the consuming country's budget increases, and overall prices need not increase much.

So I would not use the idea of a gas price floor, but that of a ratchet. It worked until the European governments dropped the ball in the mid 90s.


In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sat Nov 4th, 2006 at 03:05:06 PM EST
[ Parent ]
The problem with the tax approach is that it needs constant ratcheting up to have the desired effect, and as the perception of crisis dissapates the impetus for that change declines.

It's the argument made by the author of an article about the difference between US and European regulatory policy in the British Journal of Poltical Science.  The US led in environmental and consumer standards until the 1990's, but as US voters felt that the present regime was sufficient, they withdrew support for further change.  I suspect that the same thing has happened with Euro gas tax policy.

Thus the need for something that continues to keep the price of gas constant.

The other argument is that it is price fluctuation rather than price level that draws the ire of consumers.  They believe that they are being charged more than they should be because the next week the price drops 10%.  If consumers favor price stability over price level, a GGP offers that stability.  You don't have to wonder if you can get a better deal by waiting a day or two, or driving down the block.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Sat Nov 4th, 2006 at 11:07:34 PM EST
[ Parent ]
Constant ratcheting up is indeed what we need.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Nov 6th, 2006 at 04:49:37 AM EST
[ Parent ]
It sounds manipulative from a social perspective, but calling a tax, a tax, makes it a hard sell.  Direct and transparent always makes better policy for the long-term because most people can "reason" themselves into permanent change that way.

I agree with HiD that in practice it would require a new set of government regulations and audit controls that are self-defeating and may cost more than new revenues.  I am sure that lawyers and consultants ´round the world would be happy, though.

I guess I have switched from maybe to no.  What do I know?

Our knowledge has surpassed our wisdom. -Charu Saxena.

by metavision on Sat Nov 4th, 2006 at 07:31:39 AM EST
Instead of calling it "gas tax" we could call it...

Antiterror fund?

Patriot duty?

Anyone opposing it (not doing his patriotic duty!) is an unpatriotic terra-ist lover. ;)

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Mon Nov 6th, 2006 at 02:14:41 PM EST
[ Parent ]
can you not just see the oil companies puhing their costs up, till all of the money goes to them, and none to the governments?

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Sat Nov 4th, 2006 at 12:18:43 PM EST
If I understand what you're proposing, the retail price would ratchet up to whatever the highest historical price was, and then would stick there until the price got even higher.

A possible problem with this is that the retail price depends largely on the actions of commodity traders who may manipulate the market for various reasons. For example, some claim that the recent spike in the price of gasoline was because speculators were buying up reserves, thus causing a temporary demand spike. This doesn't reflect the underlying cost or value of the commodity, and as the overall supply versus demand situation gets worse, one might expect the spikes to get higher.

I don't know anything about economics, though. This sort of approach has probably already been thought about...

by asdf on Sat Nov 4th, 2006 at 08:12:54 PM EST
It would have to be implemented at a high level.

The idea is that having gas at a constant higher rate is more acceptable to consumers than having constant fluctations.  That consumers will accept stable prices over the hope that prices will decreae.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Sat Nov 4th, 2006 at 10:58:58 PM EST
[ Parent ]


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